Abstract

Ambiguity aversion is one of the most investigated phenomenon in decision theory. Ambiguity refers to situations where a decision maker does not know the exact probabilities of some events. The claim that decision makers systematically prefer betting on events with known instead of with unknown probabilities, a phenomenon known as ambiguity aversion, was first suggested in a series of examples by Ellsberg (1961) and was soon proved to hold true in many experiments. The importance of Ellsberg’s findings stems from the fact that they cannot be reconciled with individuals holding any subjective probabilities over events. Mainly motivated by Ellsberg’s examples, several formal models have been proposed to accommodate ambiguity aversion. One of the most important models in the literature, known as Choquet expected utility (Schmeidler, 1989), assumes that decision makers hold nonadditive beliefs (called capacities), which overweight events associated with bad outcomes.